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New Tax Rules For Small Businesses In 2018

Do you own a small business in Canada? Is your business incorporated? If you want to fulfill your tax obligation and always ensure you’re compliant, take time to understand the new tax rules and how they will affect your business in 2018. In the paragraphs below, we will cover some tax changes that the government will implement in the coming year. We’ll let you know how your small business may be affected and what you’ll need to do to remain compliant.

Increase In Tax Paid On Dividends

If you have family members in your business who earn a dividend every year, they are likely to pay more taxes on this dividend effective January 1st, 2018. Therefore, if you have family members who are part of your small business and receive a dividend, you need to make this change when filing returns. Family members will therefore not pay the regular tax rates on their dividends and this applies in each year. Under the new rules, the dividends can be taxed at the highest marginal rates.

This change was made to target small business owners who use income sprinkling as a way to lower their corporate tax return. Income sprinkling is a strategy where the business owner splits his/her income among the family members in order to reduce their tax bill. Therefore, if you allow your family members to make major financial investments in the business, expect them to bear the tax burden. This move is a clear indication that the government doesn’t want you to save on taxes by distributing your income in the form of dividends to other family members.

Family Trusts

The new rule also affects family trusts. With the changes which will be effected on January 1, 2018, multiple family members who are beneficiaries of a trust can no longer claim the lifetime capital gains exemption. There were situations where no tax was payable after a sale of shares because each of the beneficiaries of the trust claimed lifetime capital gains exemption. The government wants to eliminate this and ensure that not everyone within the family can qualify for the lifetime capital gains exemption.

Increase In Tax On Investment Income

The other major tax change involves the government’s proposal to increase the amount of tax that is paid by small businesses on investment income. This includes the income it earns on interest, rent, royalties, and dividends. This proposal is yet to be put into law. If put into law, the tax rate that is earned by a corporation on investment income will increase to 50% without any tax relief. In the case where this income is distributed to other shareholders, they will be required to pay personal income tax at a rate of 54%. Additionally, if the proposal is passed, the combined corporate and personal tax on investment income will be approximately 77%.

To find out more about the tax changes that may affect your small business in 2018, get in touch with a qualified CPA. Getting this information ahead of time will help you prepare and avoid serious penalties and interests.

Changes To Small Business Tax In 2018

Many small businesses are skeptical about the small business tax changes that are about to be implemented by the federal government. Though the government claims that the tax changes are geared towards making the system fair for all players and not just to increase the amount of revenue they earn, small businesses are likely to be the most affected.

A Highlight Of The Tax Changes

The government reported that there’s a significant number of businesses that use certain loopholes in tax legislation to avoid high tax rates. One of the strategies that some business owners use to reduce their tax bill is known as income sprinkling. This is simply where some business owners split their income with their family members in order to fall in a different tax bracket.

The other change that the government wants to make affects how dividends and capital gains are converted to income. The changes are set to affect mostly businesses that have incomes higher than $150,000 every year. Those businesses that still have substantial profits after contributing RRSP and TFSA every year will also be affected by the tax changes.

The Government Targets Income Sprinkling

Business owners have, for many years, used income sprinkling as a way of reducing income tax. In fact, the government recently reported that more than 50,000 Canadian families are using income sprinkling to reduce the tax burden on the family. This method works in the sense that it allows the owners to divert their income to other family members who earn a low income in the form of salaries, wages, and dividends. Sometimes these family owners don’t work for the company but still qualify for dividends and other sources of income. By splitting the income to other family members, it results in a reduced tax burden.

How Income Sprinkling Will Be Identified

The CRA now wants to put in place certain tests that will help them to identify business owners using income sprinkling. For instance, they will take measures to determine if the family members earning a wage or salary are directly involved in the activities of the business. If they are not actively involved in the business or how much they earn is not considered a reasonable wage (it’s too high) if you compare with market rates, it will be thoroughly scrutinized by the CRA when filing taxes.

Changes In Capital Gains

Some businesses can take advantage of the fact that they can convert their corporate income into capital gains in order to avoid paying income taxes. Capital gains include things like stocks or property that is above the purchase price. At the moment, businesses are allowed to take out retained earnings which will not be taxed if they sell the shares to a holding company. However, the proposed changes will ensure that any access to these assets will result in taxation. This step is not welcome by most small business owners as they claim it will make it difficult for the company to grow or plan for retirement programs.

Ways To Maximize Your Corporate Tax Returns

When running a business, you need to come up with structures and systems that will help you lower your tax bill. For instance, you need to have receipts for all your business expenses so collect them and put them in a secure place as soon as they are received. Train yourself to always ask for a receipt when you make a purchase or get a service no matter how small it is. This is one simple way to maximize your corporate tax returns.

Check The Receipts

Collecting the receipts is one thing, you also need to look at them and ensure they show exactly what they’re for. Check the vendor name that appears on the receipt and date. If you fail to do this, you may find yourself with a bunch of incomplete receipts when you want to input the figures in your accounting system for record keeping. It gets even tougher when you can’t seem to remember what the payment was for while trying to record it months later.

Understand The Deductions You Are Entitled To

Do you know the deductible expenses that your business qualifies for? Sometimes people overlook very important deductible expenses that can really lower their tax bill. For instance, business licensing fees and annual membership dues are deductible expenses that you shouldn’t forget. Make sure you take note of all these fees, subscriptions and memberships that you need to deduct on your income tax.

Did You Borrow Money To Run A Business?

If this is the case, any interest you are paying for the loan is also tax deductible. There are other fees related to a loan that you took to run your business that are also deductible. For instance, if you spent money in order to reduce the interest rate on your loan, this fee may also be deductible. Money spent on improving the business property can also be deductible. There are also some legal fees that are tax deductible. Taking advantage of all the tax deductions can really help you to maximize your return.

Deduct Insurance Expenses

Take note that life insurance is not an acceptable deduction. However, there are probably other types of insurance premiums you’ve paid for that are related to your business. For instance, you may have spent on insuring the building or some equipment/machinery that you use in the business. Additionally, you need the figures for any amount you’ve spent to maintain or repair the business property. Small businesses often spend money on labor and materials to improve the look of their property. This amount is also tax deductible. Just make sure you have all the receipts and invoices to support your claims.

Deduct Management Expenses

The amount of money you’ve spent managing your business is also a tax deductible. This includes administration costs incurred the past year as well as bank charges. There are other costs that you can deduct such as home utility costs if you have a home office. Work with a CPA to ensure you don’t miss out on any deductions.

How To Prepare Your Company For Tax Return

The CRA offers a list of approved tax preparation programs that you can use to help in filing returns for your business. All in all, filing taxes can be a complicated process that must be accurately done by a CPA. Throughout the year, you can take steps to prepare your company for tax returns. Let’s look at a few ways to prepare just in time to hit the deadline.

Gather All The Information Required

If you have employees in your company, gather all the information regarding their salaries and wages throughout the year. If you’re using tax software preparation programs, they’ll help you with the calculations so you won’t need to have a calculator. However, you may need a scanner to upload pay slips and other forms in the program. To make it easier for you to get this information when it’s time to file taxes, create proper structures and systems in your business that simplify record keeping. For instance, you can always ensure that the receipts and invoices are stored safely as soon as they are received and recorded in a specific place. You can also make it a rule to write some information at the back of the receipt to explain what the expense was about. These simple habits will simplify record keeping and make it easier for you to file your tax returns.

Use Simple Accounting Methods

If you choose to handle your filing without the help of a CPA, be prepared to dedicate some time and effort to this. Learn some of the strategies that CPAs use to simplify accounting and make it easier to report certain types of income. For instance, avoid using the cash method for reporting income and instead use the accrual method which allows you to report income as soon as you bill your customers. The cash method of reporting may work for certain businesses such as agents who are paid on commissions or farmers. You should also consider going through CRA guidelines to find out which method of reporting income will make your work easier when filing.

Calculate The Home-Based Business Deduction

If you run your company from home, you may qualify for several home-based business deductions. For instance, you can remove part of your expenses for utilities among other house costs from your business tax return. This is only applicable if you have a home office and you use it primarily to conduct business, meet clients and other activities that help your company generate income. Deduct part of your maintenance costs, property taxes, air conditioning costs, rent and other applicable deductions. This helps you to get the most of your business income.

Know What To Send To CRA

The CRA requires supporting documents to back up your claims. These documents include receipts, invoices, and copies of your personal information. Remember to send only copies of the originals. Also, note that you don’t have to send some other documents like T4s because the CRA can access them through their computers. If they need documents such as rental receipts, they may request for them.

Mistakes Small Businesses Make While Filing Taxes

As a small business owner, part of the joys of running your own venture comes with the burden of fulfilling your tax obligations. Making sure your taxes are accurately filed is an important step for every business owner. The CRA requires you to submit an annual tax return. It’s always advisable to handle this as early as possible so you can take advantage of all available tax deductions and credits which you are entitled to. Since tax legislation is a pretty complex subject, we always recommend working with a CPA to help you file your taxes. Additionally, watch out for the following common mistakes when filing your annual returns.

You Don’t Deduct Reasonable Business Expenses

There are so many deductions that you can qualify for. For instance, the amount of money you spent to start your business including interest you pay on loans can be deducted. Salaries and wages, as well as benefits given to employees, can also qualify for deductions. If you use your vehicle for business, you may be able to deduct expenses such as insurance costs. Don’t make the mistake of filing too late because you won’t have enough time to identify all the deductions that you qualify for.

Claiming Extra Expenses That Don’t Qualify For Deductions

As much as you want to maximize on tax deductions and ultimately lower your tax bill, you need to ensure that you don’t claim on expenses that are not deductible. The CRA can assess your tax returns anytime and when they notice something has been incorrectly claimed as a deduction, they may penalize you for it. For instance, if you have a home office, you need to be very careful when reporting it as a deduction. Not every home office qualifies as a deduction; space must be used only for work, that is to host business meetings or invite clients and do work that is related to the business. If it’s only used for business part of the time then it doesn’t qualify for the deduction.

Failing To Keep Track Of Expenses

You may qualify for certain deductions but if you don’t have the supporting documents to account for them then you’ll miss out. Make sure you put in place guidelines on how to track expenses throughout the year. For instance, make it a habit to track all your expenses immediately when they occur. There’s so much technology available to help you record expenses with ease.

You Don’t Report Cash Payments

Cash payments that are received in exchange for work must also be recorded when filing your tax returns. In fact, the CRA has very serious penalties for those self-employed and contractors who receive cash and don’t report it. If you receive payment in trade, you must also report it when filing returns. For instance, you may have marketing services to a company which promised free accounting in return. You must report the value of this service on your tax return. Doing this will avoid interests and penalties for failing to include certain payments.

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